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Under the usual
assumption of perfect competition, we have money being neutral and
changes in nominal aggregate demand cannot affect the real economic
variables. If so, a financial crisis cannot be very important.
However, the real world is characterized more by non-perfect
competition when changes in nominal demand can affect real
variables. This paper shows the important differences and explains
the crux of these differences from both the demand and cost sides.
It also provides a simplified general-equilibrium analysis of the
economy and shows that, by concentrating on a representative firm
and on how this firm is affected by macro variables and simplified
interaction with other firms, macro analysis of the economy without
assuming perfect competition is manageable with more realistic and
richer results. |